QUARTERLY GENERAL FUND
REVENUE REPORT
October 2014
Barry Boardman, Ph.D.
Fiscal Research Division
North Carolina General Assembly
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Highlights
• Prior year General Fund revenues were $450.3 million (2.2%)
below the $20.6 billion budgeted amount.
• General Fund collections for the first quarter of the current fiscal
year are $62 million below the revenue target.
• Collections on wage and salary income continues to lag behind
forecast expectations. Sales tax collections have offset some of the
weakness in Personal Income tax collections.
• A moderate growth pattern re-emerged this spring and summer
after a slowdown this winter attributed to the harsh weather. Most
economic forecasts anticipate slightly weaker than normal growth
in 2014 and the beginning of 2015.
• Employment growth has been stable over the last six months, but
job growth has not accelerated to the point where there is upward
pressure on wages.
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FY 2014-15 First-Quarter Revenue
• Through September, General Fund revenue was $62
million below the $4.7 billion target set for the first
quarter of the fiscal year.
– Collections are not further behind target because of stronger
than expected Sales tax revenue (up $74 million).
– Total Personal Income collections were $102 million below
expectations. Wage and salary withholding was 1.7 percent
below target for the quarter ($36 million below a $2.15 billion
target).
– Corporate Income tax collections were essentially right on
target with gross collections up 3.4 percent over last year.
– Most other tax revenues were close to being on target although
the Tobacco and Franchise taxes were a little below target at
$4.5 and $8.6 million below target, respectively.
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FY 2014-15 First-Quarter Revenue
FISCAL YEAR-TO-DATE (millions)
Actual
2014-15
$2,445.2
$1,537.7
$290.7
$65.4
$212.1
$2,342.9
$1,611.9
$290.4
$56.9
$206.2
($102.3)
$74.2
($0.4)
($8.6)
($6.0)
$2,712.7
$1,419.4
$358.7
$105.7
$226.5
$4,551.2
$4,508.2
($43.0)
$4,823.0
-6.5%
Nontax Revenue & Transfers
$171.0
$151.9
($19.1)
$259.0
-41.3%
Total General Fund Revenue
$4,722.2
$4,660.2
($62.1)
$5,082.1
-8.3%
Net Tax Revenue
Individual Income
Sales and Use
Corporate Income
Franchise
Other Tax Revenue
Total Tax Revenue
•
Target
Difference
Target
2014-15
Actual
2013-14
Y/Y Pct.
Change
-13.6%
13.6%
-19.1%
-46.2%
-9.0%
Note that year-over-year comparisons are not very helpful because they do not
take into account recent tax changes, large one-time events such as non-tax
payments and transfers, as well as other collection anomalies.
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FY 2014-15 First-Quarter Revenue
• Important Reminder: The first several months of
the fiscal year are typically the least important
months as an indicator of revenue trends for the full
fiscal year.
– Major receipts in these months (sales, withholding tax)
closely track the experience of the last few months of the
prior fiscal year.
– Revenue from volatile sources (corporate and nonwithholding personal income) are not fully realized until
the second half of the fiscal year.
– Personal Income tax law changes that began in 2014 will
mean April 2015 payments will hold even greater
importance.
• Income tax base-broadening such as limiting itemized deductions
and repealing the business income deduction should mean an
increase in end-of-tax-year payments and lower refunds.
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FY 2014-15 First-Quarter Revenue
• Growth in key economy-based taxes (wage and salary
withholding income tax and the sales tax) continue to move in
opposite directions.
– Baseline Sales Tax growth maintained the solid growth
established earlier in the summer and during the first quarter
of the fiscal year net collections were 4.8 percent above last
year (see page 6).
– Net Personal Income withholding collections (withholdings
less refunds) are below expectations. Year-over-year
comparisons are not useful because of the tax changes in
S.L. 2013-316 (see page 7).
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Tracking Economy-Based Collections
Baseline growth for FY 2013-14 improved to 4.1 percent. The calendar year
started slowly with only 2.4 percent growth, but the first quarter of this fiscal
year finished strong with 6.0 percent growth. The consensus forecast growth
rate for the fiscal year is a cautious 4.5 percent.
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Tracking Economy-Based Collections
Net Withholding income growth (withholdings less refunds) have
dropped off dramatically over last year as a result of tax law changes
in S.L. 2013-316. Even without the changes net withholding would
have weakened as wage and salary growth remains at only 3 percent.
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Prior Year Recap
• At the start of FY 2013-14, the economy was modestly
improving. During the first-half of the fiscal year the
economy strengthened and economic output rose above
average. The harsh winter at the start of 2014
temporarily halted economic growth, but by spring the
economy was back on track.
• The overall moderate growth aligned with the consensus
forecast; however, collections were $450.3 million
(2.2%) below the $20.6 billion General Fund forecast.
• The shortfall in collections could be attributed to three
factors affecting Personal Income tax collections.
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Prior Year Recap
• The three factors affecting Personal Income tax
collections were:
– Slower than expected wage and salary growth;
– timing of taxpayer adjustments to tax law changes
enacted last year; and,
– underestimating the impact of the 2012 federal
“fiscal cliff” on 2013 final income payments.
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Prior Year Recap
• Personal income tax collections were $724 million below a
$10.9 billion forecast. An estimated $425 million of the
under-collections were related to difficulties with timing the
impact of tax law changes.
– The impact of lower withholding tables due to the rate cut had an
immediate impact on collections, while base-broadening measures
will not be realized until April 15th tax payments are due.
• $100 million of the under-collections was attributable to the
federal “fiscal cliff”.
• Sales tax collections improved throughout the year ending
$121 million above the $5.4 billion forecast.
• Corporate income tax collections came in $108 million
above forecast.
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Prior Year Recap
Here’s how key revenue items turned out ($ million)
Budgeted
Actual
Difference
$8,308.8
$7,622.1
(6.7)%
$2,650.3
(1.4%)
$10,272.4
(6.2%)
($686.7)
Personal Income Tax
Withholding*
% Yearly Growth
Non-Withholding**
% Yearly Growth
Net Collections
% Yearly Growth
$2,688.0
$10,996.8
($37.7)
($724.4)
Sales Tax
Net Collections*
% Yearly Growth
$5,444.1
$5,565.2
5.1%
$121.1
$1,249.2
$1,356.9
13.9%
$107.7
Corporate Income Tax
Net Collections*
% Yearly Growth
*Collections less refunds and transfers.
**Quarterly estimated payments plus April 15 tax payments.
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Economic Outlook and the Revenue
Forecast
• The economy has been unable to move into overdrive an
unstable global economy continues to slow the pace of growth.
• The economy does continue to improve, but not at a strong
enough pace to produce a robust job market. Recent minutes
from the Federal Reserve Board’s Open Market Committee
noted that "there remains significant underutilization of labor
resources."
• It is this underutilization that has kept improvements in the
overall economy from being more widespread. A tighter labor
market would place more upward pressure on wages. Last
fiscal year, wage and salary growth was an anemic 3 percent,
which was well-below the forecasted 4.4 percent growth.
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Economic Outlook and the Revenue
Forecast
• This fiscal year the forecast envisions wage growth of 4.7
percent. This is still below average growth, but well ahead of last
year’s pace.
• For wages to grow at this stronger pace, non-farm employment
will have to meet projected growth of 2.1 percent (86,000 new
jobs) during the fiscal year.
• Last year, non-farm employment grew by 79,300 jobs, which was
slightly better than the gain of 77,100 the previous year.
• Through the first quarter, employment is estimated to have grown
at an annualized rate of 1.8 percent; wages have grown at 4.2
percent.
– While these estimated growth rates are below expectations for the full
fiscal year, they represent improvements over the second quarter of
2014.
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State’s Economic Outlook
• Since 2012, the State’s economy has steadily been gaining
strength. While we do not anticipate the pace of economic
growth to significantly quicken, we do expect it to stay on a
steady upward trend.
• North Carolina’s Gross State Product, a measure of the State’s
economic output, kept pace with the nation’s output in 2012
and 2013, and is forecast to keep pace with the national
average pace of growth in 2014 and 2015.
• While manufacturing is not the major employer it once was in
the State, it remains an important economic engine. Economic
growth in this sector, which had a setback in 2012, is expected
to slightly outperform the national average by 2015.
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State’s Economic Outlook
The unemployment rate was 6.4 percent in August. Over the next
six months the State’s unemployment rate is expected to stay
above 6 percent. While continued job growth will occur a
growing labor force is expected to keep the rate from falling by
more than a few tenths of a percent. In the first quarter of 2015,
the average monthly rate is forecast to be 6.2 percent.
Source: Actual data from the NC Division of Employment Security, Forecast by FRD shaded in gray
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State’s Economic Outlook
Changes in non-farm employment have moved at a similar pace
as the overall economy. The chart below shows how the State has
improved since employment peaked in February of 2008. Nonfarm employment is now 31,000 jobs (0.7%) below peak.
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Conclusions
• Current year revenue collections are down 1.3 percent through
the first quarter of FY 2014-15.
• The first quarter provided mixed results. Personal Income tax
withholding on wages was below target. Sales tax collections,
on the other hand, are running ahead of target.
• The economy continues to strengthen, but the pace of growth
remains below average. The slow growth pattern makes us more
susceptible to economic and policy shocks and places the risk to
the forecast at a higher level.
• With the first quarter running slightly behind target, pressure
increases on the expectation that April 2015 collections will rise
significantly as taxpayers make higher final payments and
receive smaller refunds. These expectations arise from the tax
law changes enacted last year.
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